Shimasaki Craig D. The Business of Bioscience: What goes into making a Biotechnology Product

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123How Much Money Does a Company Need to Raise?

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progress as possible early with smaller rounds of capital. In Chapter 9 we review

typical company funding stages and typical amounts raised.

The information below provide general ranges of capital needed for various

product categories, but remember, there is variability within each of these categories;

however, they provide a good first approximation of how much time and money

will be needed to develop a product to reach commercialization.

Therapeutic Estimates

Drug development of therapeutics such as small molecules, biologics, or geneti-

cally-engineered drugs are by far the most costly and time-consuming category of

the four – yet they provide the potential for the greatest investment return. The

Pharmaceutical Manufacturers Association has estimated the costs of developing a

drug from basic research to commercialization, is over $1 billion dollars and takes

an average of about 12–15 years. Although these figures include the cost of failed

drugs in development, any one therapeutic in development can cost in the range of

a few hundred million dollars. Therapeutics and biologics, compared with the other

categories discussed, have longer preclinical development and clinical testing

requirements, accompanied by longer FDA review times. As an entrepreneur, you

do not need to plan on raising $1 billion dollars for your start-up company because

a good portion of your capital will come later through potential partnership licens-

ing arrangements, an acquisition, or even an IPO. You must recognize that you will

need potentially hundreds of millions of dollars over the life of your product devel-

opment to have a chance of success in developing your therapeutic.

The biotech and pharmaceutical industry as a whole has spent much effort,

thought, and strategy on reducing drug development, clinical testing, and approval

times. Industry attempts at reducing drug development time have previously resulted

in combinatorial chemistry platforms, high-throughput screening, and more recently

in-silico models. The drug repositioning business model was developed as an attempt

to reduce the time, money, and risk of new drug development by examining existing

shelved drugs for new target uses based on genomic information. These approaches

may shave off a few years of development time, and shorten the clinical testing time

or eliminate a small amount of FDA review time, but you can still expect that it could

cost hundreds of millions of dollars and take 8 to 15 years to reach commercialization.

Diagnostic Tests Cost Estimates

Diagnostic tests include, commercial test kits sold to clinical and research labora-

tories and physician’s offices, and tests for over-the-counter use. Categories of tests

include infectious diseases, metabolic tests that run on large automated platforms in

hospital or clinical laboratories, and point-of-care tests run in physician’s offices.

The FDA categorizes these as in-vitro diagnostic (IVD) tests. The costs to

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develop diagnostics become higher if instrumentation and software are required to

perform the test, when compared to test kits for over-the-counter or physician’s

office. In general, development costs for most diagnostic tests average in the range

of $15–$50 million dollars. However, development costs can be as small as $7–$10

million dollars for simple follow-on tests using a previously developed testing plat-

form. However, equipment-based testing costs can run over $50 million. For mar-

keting in the US, keep in mind that most all diagnostic tests are required to clear

the FDA before marketing, but development costs will vary based on the regulatory

pathway required for clearance or approval, be it a 510(k) vs. PMA (discussed in

Chapter 13). The regulatory route will affect the time to product launch, and ulti-

mately the costs for development, clinical studies, and general overhead. For

instance, a product with a 510(k) regulatory requirement will take less time, and

therefore cost less than a PMA regulatory pathway because less clinical data are

required. Also, the amount of information necessary for approval is less stringent,

and the time to finance the company prior to revenue generation is shorter.

Medical Device Estimates

Medical devices encompass a large and diverse group of tools for medical care and

treatment. Medical devices include cardiac pacemakers, catheters, defibrillation

machines, X-ray machines such as mammography devices, orthopedic devices, bio-

sensors, biomaterials, and laser surgical devices. Depending on the particular medical

device and technology, development costs can range between $25 and $60 million

dollars or more. Drug-eluting stents create a convergence of medical devices and thera-

peutics; this introduces unique challenges for regulatory review and development, and

the costs for these devices are much greater than the medical device group in general.

Development and clinical testing costs for new drug-eluting stents and implantable

drug delivery devices may range between $50 and $120 million or more.

Clinical Laboratory Services: Genetic and Gene Testing

of Molecular Markers

The discovery of new genes and expression products for predictive, prognostic, and thera-

nostic testing is creating a genomics and genetic testing subspecialty. This category

includes various genetic markers (DNA, copy number variation, epigenomic markers,

SNPs, etc.) and monitors of expression levels of RNA from multiple genes. These types

of tests may use complex algorithms for generating results. These tests make up the newly

emerging personalized medicine arena, and provide potential for one of the most signifi-

cant changes in how medicine will be practiced in the future. Regulation for genetic test-

ing services is changing, and it appears that the FDA will add additional regulatory

125How Long Does It Take to Raise Money for a Start-Up Company?

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requirements for these tests, even though laboratory services are currently regulated under

the Clinical Laboratory Improvement Amendment (CLIA). The costs to develop these

services will greatly increase if FDA regulation is required in addition to the current regu-

lation as clinical laboratory services. These types of tests may cost between $25 and $100

million dollars or more to reach commercialization. Part of the variation in development

costs is attributed to the number of genes, or gene expression markers needed to generate

a result. Cost variation also includes the number of individuals needed to be studied for

development, clinical testing, and evaluation of performance.

How Long Does It Take to Raise Money for a Start-Up

Company?

The short answer is – longer than planned. The background of the entrepreneur may

often correlate with the amount of capital they can raise, and the relative speed in

which they can raise it. One reason for this is that to raise such large amounts of capi-

tal, investors must have sufficient confidence that the entrepreneur is a capable busi-

nessperson, and someone who can run a successful company. If investors are not

confident in the entrepreneur’s skills to run and grow a successful organization, they

will not invest. These are “founder effects.” Figure 1 illustrates the relative time to

raise multiple rounds of capital, based on the background of the entrepreneur in

each category. This is a generalization and not the rule. Time is also affected by other

factors such as the entrepreneur’s experience, contacts in the industry, financing win-

dow, and industry subsector, so view these as central tendencies. These timeframes

are depicted as relative for funding, compared with each of the other groups.

Depending on the stage of the company, the actual time it may take to raise capital

can be 6–12 months, to 2 years for the first institutional round. To get an estimate of

how long you have to close the next round of capital, calculate the total capital in the

bank, and divide this by the company’s monthly burn rate to get the runway room

(number of months with cash), then reduce that number by 3–6 months (your cash

reserve). This is the time alloted in months to close on the next round of funding.

Academic Scientist or Physician

If an academic scientist or physician is the founder and the individual raising the

capital, it will generally take them longer to attract capital than a life science industry

or businessperson. Much of the longer timeframe has to do with the learning curve

in attracting and raising capital. Other reasons are lack of existing financial contacts,

and the time to establish business credibility. Most academic scientists do not usu-

ally start off with existing relationships in financial circles, whereas someone from

a business background may already have existing venture capital contacts.

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Industry Scientist or Industry Physician

Another group of individuals who start biotechnology companies are industry

persons with a technical background and management experience. These are

individuals who are working in the biotech or pharmaceutical industry, having a

Ph.D., M.D., or equivalent experience, and are in technical management posi-

tions. These individuals have the potential and can be ideally suited to lead suc-

cessful biotechnology companies because they possess the technical knowledge

and the business and management experience required to start and grow a bio-

technology business. George Rathmann, a Ph.D., Physical Chemist and the first

CEO of Amgen is such an example. Though he was not the original founder of

the company, he arrived shortly afterwards, and built one of the premier biotech-

nology companies in the industry. Most technical entrepreneurs do not come

with extensive business management experience or financing backgrounds, and

this is a reason their time to raise capital is longer than a businessperson’s ability

to raise capital. A successful industry physician who left Genentech as VP of

Clinical Affairs was Steve Sherwin, M.D., he founded Abegenix, and later

became CEO of Cell Genesys.

Businessperson (Nonscientist/Nonphysician)

Many businesspeople can be successful at building a biotechnology company. The

establishment of Genentech was a good example of a businessperson’s ability to

raise capital quickly for a start-up. Rob Swanson left his VC organization and

sought out technology for a start-up, and joined forces with Herb Boyer of UCSF.

The two of them created the beginning of the biotechnology industry. In this

instance a businessperson joined with an academic scientist to start a biotechnology

Academic

Scientist /Physician

without assisance

Industry

Scientist/Physician

Businessperson

Non-Scientist

Non-Physician

Spin-Off Group

from Industry

Time

Seed

Capital

Development

Stage Capital

Follow-on

Capital

Time

Seed

Capital

Seed

Capital

Seed

Capital

Time

Development

Stage Capital

Development

Stage Capital

Development

Stage Capital

Fig. 1 Comparative time to raise capital for various entrepreneur backgrounds

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company. Each knew their strengths and weaknesses and each filled the ideal role

suited to their backgrounds. Sometimes a VC group identifies a business and

market opportunity based on the research of an academic scientist, and then asks

them to participate in starting a biotechnology company. In this situation, the VC

representative will usually be the one leading the organization. In both these exam-

ples the time to raise capital is shorter than for the Industry Scientist or Physician,

and the Academic Scientist or Physician.

Splitting the technical/scientific and business/finance/market roles is common in

many start-up companies, but this can create issues to be aware of, which we briefly

addressed in Chapter 2. Depending on the communication and working relationship

between these two individuals, this division of labor can later hinder or accelerate

the growth and successful development of the organization after funding.

Spin-Off Group from Industry

Start-ups that begin by spinning off from larger companies can instantaneously

raise money because of the credibility that comes with the existing staff and

advanced products in development. These spin-off groups can self-form from

within the larger company and voluntarily leave, or they may be motivated to leave

by an impending layoff. Sometimes these spin-offs can be initiated by the par-

ent company, such as in May 2008 when Pfizer announced the spin-out of

Esperion. In this example, simultaneous with the spin-out, Esperion announced

securing their first financing of $22.75 million dollars backed by four seasoned VC

groups.

Major pharmaceutical companies may discontinue development of a product

segment, and sometimes a group of employees will license the intellectual property

and start a company. In August 2004, Baxter Healthcare Pharmaceuticals decided

to discontinue the development of its respiratory therapeutics. Rather than licensing

out these compounds, they spun out a biotech start-up called Aerovance with 20

employees. This start-up company began with equipment, talented employees, and

intellectual property, and instantaneously raised $32 million dollars; shortly there-

after the company raised another $60 million to continue clinical studies of their

mid-stage drugs. Alas, the academic scientist and physician should be so fortunate

to see lightning quick capital raises as this. Unfortunately, this is not the speed for

capital raises within the previous three groups.

The time horizon for raising capital can be dramatically different depending on

the background of the entrepreneur. These timeframes can be months, or even years.

The time to raise the first seed capital round can take the longest, followed closely

by the time raising the development-stage financing, and then the first institutional

round of capital. These timeframes are generalities that I have seen in practice, and

are not necessarily a rule for funding; however, this will give you some idea of the

patience and persistence that may be required during fundraising based upon the

background of the entrepreneur.

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Geographic Location Effects

Another factor that affects the time to raise capital for your biotech start-up is one

you do not control – this is an address. In the US, if the address ends in San

Francisco, Boston, or San Diego, a good bet is that you will have quicker success

in attracting capital than your counterparts in the middle of the country, or outside

a major biotech hub. Geographical location has an impact for biotech companies in

all countries and not just the US. Location is not always a determinant of whether

one can raise money, but it is certainly a factor that impacts the time to raise money.

First some interesting generalizations:

1. In the US, the likelihood of raising signiﬁcant amounts of capital is directly pro-

portional to a company’s proximity to large bodies of water. See Chapter 1 for

locations of most publicly traded biotechnology companies.

2. The farther a company is inland, the longer it will take to raise institutional

rounds, particularly VC.

The major biotech clusters in the US reside on the East and West Coasts near the

largest sources of VC money. In Europe and the UK, there are also concentrations

of biotechnology found in accepted biotech locations, and companies residing

outside these locations have similar difficulties in attracting capital. When a company

resides outside a biotech cluster, finding capital can be a challenge. However, this

situation is progressively improving. More capital is being invested in nontradi-

tional biotech clusters and nonhub states and municipalities are creating their own

sources of funding for life sciences. In the future, it should be easier to raise capital

irrespective of address, but for now, it presents an obstacle that has required some

companies to relocate in order to receive a large round of capital. However, do not

presume that residing in a biotech hub in any way guarantees funding.

Where to Go to Raise Capital?

There are several sources of capital for biotech companies. Each source has different

interests, different limitations, and each source brings a different value to an

organization. It is important to know the objectives and interests of each capital

source, so you may focus your precious time on the ones that have the highest

likelihood of investing. Each financing source has preferences in investing at a

particular stage of development, so do not waste time by approaching them at the

wrong development stage of the company. Below is a list of the most common

sources of capital for biotechnology companies, accompanied by an overview of

each group, and the typical stages of company development at which they invest.

The various investor groups include: your own personal capital, Friends and

Family, Angel Investors, Local government programs and grants, VC, Foundations,

Corporate Partnerships, and Institutional Debt Financing.

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Personal Money

Often founders put up their own money when the organization is first established,

and to purchase founders shares of stock in the company. This funding gets the

company formed and started. Investing one’s own money demonstrates a financial

commitment, and this is reassuring to the next group of investors that the founders

have a vested interest in the endeavor. Having “skin in the game” speaks volumes

when approaching others for financing. It says that the entrepreneur has a commit-

ment and a strong belief in what they are doing. Entrepreneurs do not always have

to put enormous amounts of their own money into a start-up company; but having

some money invested early on is extremely helpful even if it is nominal. Rob

Swanson and Herb Boyer each put up $500 dollars when they founded Genentech.

This amount would be considered immaterial to today’s investors. The question is

how much cash is reasonable for a founder to have invested? Having all of your net

worth invested in your idea is admirable as to a commitment, but not very smart

from a financial basis. As a founder, a cash investment equal to 5% of their net

assets is viewed favorably. In general, a cash investment in excess of 20% of one’s

net worth could be considered naïve given the risky nature of the business, and it

may reflect unfavorably as to their business acumen.

If an entrepreneur does not have money to invest in their start-up organization,

they should not be too concerned. It is not unusual for biotech founders not to have

put up money for equity, as they will have “sweat equity” in the company. Some

investments are usually tied to purchasing founders shares, which may have tax

consequences if the “fair market value” of the stock was not paid. Various types of

stock, and the granting and purchasing of stock options are discussed in Chapter 5.

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Friends and Family

Friends, family members, and associates generally invest because they know the

founders or inventors. They usually invest because they believe in them rather

than because they understand the technology or market opportunity. Capital from

this source usually joins or follows the entrepreneur’s own money near the time of

the start-up. It is a good idea to find as many other investors as possible when taking

money from this group. Early stage risks are extraordinarily high, and this group

usually does not have the investment experience to understand the risks, nor do they

have large amounts of excess capital to lose. Though this group can be a good

source of early stage seed capital, do not forget that family and friends may also be

sitting across the dinner table at Thanksgiving and Christmas, so be aware of the

potential for changes to these relationships.

This is a good time to talk about OPM, or “Other People’s Money.” You are

seeking and will be spending OPM, and therefore, your responsibilities broaden to

more than just the company. Because of this, it is important to have a solid plan for

how much money will be needed at each stage of company development, how much

money it will take to reach each value increasing milestones, and to be frugal with

finite resources. Money is a precious and limited commodity to a start-up company.

Money is like gas to a vehicle; you may have the most powerful engine and the

most impressive make and model of automobile, but if there are no fueling stations

around, you will go nowhere. Recognize that there becomes now a shared level of

involvement with others, and an increased level of responsibility for OPM. Too

often the founder or CEO secures funds from others, and begins to think it is their

money to do with as they please. It is still OPM, and must be used and spent as such –

by doing so, better decisions will be made along the way.

Peer-Reviewed Grant Funding

Many biotechnology companies fail to consider grants as a source of funding for their

start-up. As previously mentioned, this is an excellent source of nondilutive funding

at early development stages, and it reduces the amount of money needed to raise over

the life of the organization. Most professors or scientists from an academic back-

ground are familiar with the National Institute’s of Health (NIH) peer review grant

system, as well as other federal agencies that have extramural grant programs.

Scientists coming from industry may be more familiar with the Small Business

Innovative Research (SBIR) program that awards competitive grants through 11 fed-

eral agencies. Because you are a for-profit company, your best avenue for grants

would be to utilize the SBIR or the Strategic Technology Transfer Research (STTR)

programs to fund some of the research and development efforts. The amount of

money awarded from the SBIR and STTR can be significant in helping to build and

develop the technology during its early stages. SBIR Phase I grants can provide up to

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$100,000 or more for 6 months, whereas SBIR Phase II grants can provide up to

$1,000,000 or more for 2–3 years. Recently, follow-on commercialization programs

awarding $500,000–$3,000,000 have been introduced for successful products

completing Phase I & II SBIR programs. NIH and NSF pioneered these programs

that are likely to be copied by the other 11 federal agencies.

I know of an engineering technology company that has been extremely successful

in writing and winning SBIR grants, such that they funded the entire company’s

research and development program by the sheer number of SBIR grants they won

each year. Although the goal of the SBIR is to move companies from research and

development to commercialization, it is possible to significantly fund R&D through

grants to offset capital requirement from other sources. For those who are not profi-

cient grant writers, you should consider the free SBIR workshops that assist in

improving your grant writing skills. Alternatively, look into grant writing services

that could assist in these efforts, but realize there are up-front costs and a success fee

if the grant is funded. Companies that win peer-reviewed grants bring credibility and

validation to their research. VCs looks favorably on companies successful in win-

ning Phase II SBIR and STTR grants. The ability to win multiple peer-reviewed

grants is an encouraging sign that the research is competitive enough for a group of

peers to believe it is worth funding. There are many sources of federal grants, and

each federal agency has their own program. More information can be found on the

Small Business Administration website at http://www.sba.gov/SBIR/.

State and Local Financing Program Support

The bioscience industry is attractive to local municipalities because it is a high

technology and clean industry that provides high paying jobs, and expands the local

knowledge-based economy. As discussed in Chapter 1, there are five elements essen-

tial for building a biotech industry, and access to capital is a key. Local governments

understand this and have developed programs to fund start-ups and development-

stage technology companies, particularly bioscience companies, in an attempt to

jump-start their local bioscience industry. Many cities and states have allocated

hundreds of millions, even billions of dollars in funding initiatives for support of

local biotechnology growth initiatives. Entrepreneurs should familiarize themselves

with their state or local support. It is also worth contacting the local Chamber of

Commerce and state Department of Commerce for more information on what pro-

grams may be available. Some of these programs provide merit-based technology

loans with long-term paybacks triggered by significant funding events. Many states

also have seed capital funds that coinvest with Angels in exchange for equity partici-

pation. You may be pleasantly surprised at the seed capital availabile directly from

your own state. Realize that you will need as much financial help as you can get,

so spend time finding out about state and local government assistance programs – it

will be time well spent. Many states also have their own granting programs. If your

state has a granting program, you may be eligible to make application for competitive

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grants, where you compete against a smaller pool of researchers. Check into your

state’s initiatives that support grants for diversification in new technology.

Angel Investors

An Angel Investor is a term given to high-net worth individuals who invest in early

stage companies. This term is ascribed because these investors are considered

“Angelic” or “heaven-sent” by coming to rescue a company at critical times, pro-

viding the life support financing needed. Most often the term Angel Investor is used

synonymously with, and is interpreted to be, an “Accredited Investor.” These are

individuals defined by the Securities and Exchange Commission (SEC). An

Accredited Investor is an individual (or individual and spouse) with a net worth of

over $1 million dollars, or an individual with an annual income of $200,000 or

more, or $300,000 with a spouse. They must have this income for the past two

years, and a reasonable expectation of the same for the current year. An Accredited

Investor is further defined by the SEC in Rule 501 of Regulation D.

Angel investors may work alone or in groups such as in Angel Networks having

formal or informal communications across the country or internationally. There are

some well-established sophisticated syndicate angel networks. One such example

is the Tech Coast Angels that have formalized structures and funding review sys-

tems clearly outlined for potential investments. Angel investors generally invest at

early stages of an organization, either during the Seed stage or Early Development

(funding stages discussed in Chapter 9). Most Angel investors do not usually coin-

vest with later institutional investors or VC funds. A typical Angel investment can

range from $25,000 to $250,000 dollars, and in rare cases an Angel investor can

invest multiple millions, depending upon their interest in the technology, and their

capital resources. In the US, there are over 400,000 active Angels investing in vari-

ous companies. Most of the time, Angel investors can be found within one’s own

geographic location, and in general, they usually prefer to invest in companies

within their geography. The reason for limiting an investment to their locale, is an

affinity to help local companies, coupled to a lack of interest in traveling long dis-

tances to monitor an investment. However, larger, more sophisticated Angel net-

works will occasionally invest outside of their geography. But realistically, for a

higher likelihood of success, locate Angels in your own geographic region.

Finding Angel investors can be challenging because they usually do not do this as

a full-time job, and they do not advertise their activities. The best way to find

Angels is by networking with people who know them, and by asking them for

introductions. Check with your local university or research institution technology

transfer office for names and contacts, as they may know many of the local Angels.

Also check with the local Chamber of Commerce, regional economic development

agency, or a technology commercialization center or equivalent – these may be

good sources of Angel contacts that invest in biotechnology. Most Angels are good

sources for names of other Angels. Once an Angel has invested, ask them for help